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Howard Wetston, chairman of Ontario Securities Commission.Fernando Morales/The Globe and Mail

Canadian market regulators need to take a look at the reverse takeover structure that has allowed companies like Sino-Forest Corp. onto the country's stock markets with little regulatory scrutiny, Ontario Securities Commission head Howard Wetston said.

"We need to take a look at RTOs," the head of Canada's biggest securities regulator said at a Toronto luncheon. The issue is that "securities regulators don't have as much involvement in RTOs" as they would in an initial public offering, Mr. Wetston said.

An IPO requires a company that wants to list, to file a prospectus which regulators have to approve. In a reverse takeover, it gets around that regulatory hurdle by merging with a small company, often a dormant shell, that already has a listing on the Toronto Stock Exchange or the TSX Venture exchange.

Mr. Wetston said that a look at RTOs may result from the commission's review of emerging markets companies that list in Canada. That review was launched in the wake of a short-seller's allegations that Sino-Forest was overstating its timber assets in China.

The OSC is also investigating Sino-Forest itself, and has alleged that there may have been a fraud at the company. The regulator has also ordered that trading in Sino-Forest securities cease.

In the United States, the Securities and Exchange commission launched a wide probe of RTOs and has suspended trading in at least six Chinese companies that listed in the U.S. via reverse takeovers, and warned investors about the risks of investing in such firms.

Mr. Wetston didn't reveal any news about the state of the Sino-Forest investigation, saying only that a probe on two continents is a big challenge and the probe is ongoing.

"These are allegations," Mr. Wetston stressed, adding that "we have a lot of work left to do on this matter."

Mr. Wetston also touched on a handful of other contentious topics in Canadian capital markets, including the recent Appeals Court decision to uphold the fraud charges for Livent Inc. founders Myron Gottlieb and Garth Drabinsky. The company collapsed in 1998, and the legal drama has dragged on since. On Tuesday, the pair lost an appeal, and were ordered to begin prison sentences. Mr. Drabinsky's sentence is five years and Mr. Gottlieb's is four.

"It may have taken a long time, but it does seem that justice has been served," Mr. Wetston said.

He also weighed in on a question about whether there would be conflicts of interest resulting from the pending hostile takeover bid by a group of Canadian financial institutions that calls itself Maple for the TMX Group Inc., which operates the TSX.

"Conflicts of interest will clearly be an issue we will have to address," he said.